The CEO looked in disbelief at his company's latest audio device prototype representing two years of groundbreaking engineering - burnished-chrome design, the result of months of intensive effort by a team of international engineers. The future of his business hung in the balance on the successful launch of this product, just four months away. Yet here he was holding it in his hand, having purchased it on eBay! How could something so catastrophic happen?

An audit of the firm's manufacturing facility in China revealed several weaknesses, including the way prototypes were stored. Under the contract with the factory, items were to be kept in a room until destroyed in the presence of a company representative. Because these goods sat for some time in a room with poor physical security, the
temptation to sneak them out past metal detectors, or through an open window, proved too great for some factory employees.

Sellers on eBay were also identified and questioned to determine the full distribution chain. Most of the leaked products were eventually recovered, the distribution network dismantled and the factory secured. However, severe damage had been done as competitors and counterfeiters had an advance look at the newest design.

Intellectual property (IP) is an intangible asset, protected by law so that its creators can enjoy the financial benefits of their labor. This is done through laws relating to copyrights that protect the expression of a work like movies and music, trademarks that protect the value of a brand or reputation, patents that protect innovative inventions like
new drugs and mechanical designs and even trade secrets, which protect items of economic value, like customer lists and manufacturing data.

Because these laws exist, individuals and companies are able to invest hugely in the creation of IP, a trend that increases as an economy matures. Recent studies have shown that intangible assets represent over 70 percent of a typical US company's total assets. Yet given the high value and highly portable nature of IP, it is often the target of theft and increasing threats, especially as companies expand overseas.

It is important to note that this risk is not just to foreign companies. China has become a market leader in some sectors and has a highly skilled and educated workforce turning out some great new inventions, works and brands. One does not have to dig very far in the numbers to determine that by far and away the biggest filer and prosecutor of IP rights in China are Chinese companies, not foreign multinationals. As the IP-centered economy takes hold, it is essential that domestic companies also take active steps to avoid becoming the victim of IP fraud.

Examples of typical IP fraud cases in China often involve things like night manufacturing, in which licensees report the products they make during the day, but not those manufactured at night, when enforcement authorities and company representatives are less likely to visit. In some cases, terminated licensees continue to manufacture a company's products. Sometimes, company officers and employees are paid to obtain information, or may suffer from extortion threats.

In addition, as a result of the current market turmoil, some companies are reducing staff. At such times, the risk of IP theft is heightened as upset employees may decide to leave with the company's intellectual property, trade secrets, customer lists, pricing or other sensitive data. In one instance, a foreign competitor filed a patent on technology that had taken its archrival years to develop only a few months after it had hired a critical group
of engineers away from the rival firm. The rival firm was not even aware that its employees had defected to the foreign competitor until it was too late.

It is critical that companies in China and elsewhere take several proactive steps to protect themselves from the loss of IP:

Conduct an IP audit: Identify your key IP that needs protection, determine how this is currently being protected, and implement improvements. This includes not only understanding, from a technical perspective, the IP pipeline essential to your company's success, but also analyzing legal rights on file, where they are registered, and monitoring capabilities.

Review HR policies: Ensure that appropriate non-disclosure, non-compete, and IP ownership provisions are signed locally, especially when new employees are hired, and that all IP assets are gathered upon termination.

Evaluate IT system access: Ensure computer rights and logging policies for access to electronically stored data are in place, as well as policies that control if this information can be copied, especially onto portable media such as USB flash drives.

Don't forget physical security: Locks, cameras and access to areas where IP is kept are crucial. Conduct other evaluations relevant to your particular IP, corporate structure and environment.

An expert third party in these areas may help to ensure that your overall security scheme is viable, as well as break down corporate lethargy that often prevents appropriate implementation of effective, but reasonable, steps.

Companies are advised to implement improvements based upon the location of facilities and the risk involved. Do not assume that the policy that has worked in the United States or Europe over the years is the same one that should be implemented in China.

Design enforceable IP rights: When creating your product, consider how you might include IP that is more easily enforceable, such as trademarks, to protect IP that is more challenging to defend in most countries such as patents and copyrights.

Also consider use of security devices and packaging printing methods that can help you and the consumer identify genuine products. This can greatly enhance your ability to thwart fraudulent products and counterfeits.

Know your local partner: Before entrusting your valuable IP to an unknown third party, conduct a detailed background check on the entity, its key executives and its employees. Determine if they are trustworthy, have been involved in counterfeiting in the past or might have interests that run counter to your company.

Know your supply and manufacturing chain: Among the strategies available is implementation of royalty-tracking devices throughout the supply chain to better insure accurate collection of this income. Furthermore, bring an IP theft expert on site visits to suppliers and manufacturers. Such an expert may notice things, intentional or not, that
will greatly enhance your IP protection.

Develop a culture of IP protection: The overarching goal is to establish a culture of IP protection within your organization and among those with whom you do business. Taking the above steps will not only guard your IP better, it sends a clear message that you value your intellectual property, and that your employees and partners should do the same. If people know that you are serious about defending your IP, they will be much less likely to try to abuse your trust in the first place.

Don't wait: If intellectual property is a key component of your company's success, take proactive steps to protect it as soon as possible. All too often companies wait too long to implement IP protection, usually acting only after a significant loss. Frequently, the company must wait until the next product life cycle in order to recover, assuming that it can do so at all. In the long run, early prevention steps are the best recipes for success.

(Source: SIPO 2009-06-22)